Thursday, 28 January 2010

History of UK public debt in recent years

The website UK Public Spending is an invaluable resource of economic history. It enables all to cut through the rhetoric and see whether the state shrank or grew under different governments.

Let's look at public debt.

In 1900 it was (as a share of GDP, which is the fairest and easiest comparator) around 30.2%By the start of World War 1 in 1914 it had shrunk to 25.3%. So the start of the 20th century was a period of fiscal prudence, and prosperity.

World War 1 cost though. By the time the war ended, public debt had ballooned to 135.2% of GDP in 1919. An astonishing rise, demonstrating the enormous financial cost that accompanied the human cost of that futile war.

Between 1919 and the 1929 start of the Great Depression little had been done to address the public debt, which had ballooned further to 159.6% of GDP. The UK government had its share in the overdebtedness of the time.

The 1931 election, which saw a crashing defeat for Labour saw the incoming administration facing public debt of 171.5% of GDP.

By 1939, with the economy emerging into recovery it had shrunk to 137.7% of GDP. Still, the key point is that the UK public finances did not ever recover from the devastating cost of World War 1 and the subsequent economic policies.

World War 2 understandably nearly bankrupted the UK, with public debt soaring to 215.6% of GDP. At that point, Labour was returned to power with a socialist agenda of the NHS, wider public education, welfare and nationalisation of major industries. In addition, there was much reconstruction of devastated cities and infrastructure.

By the 1950 election, the recovery of the economy helped to bring the public debt down to 194.2% of GDP, still much higher than when the war started and not helped by the nationalisation of railways, coal mines, steel and healthcare. Of course in that election, Labour won a very slim majority and its attempt to boost it in 1951 backfired, with the Conservatives led by Winston Churchill, being returned to power.

Churchill retired in 1955, by when the public debt had dropped to 138.1% of GDP, through a combination of postwar recovery and prudence.

The 1959 election had seen Harold Macmillan take over as Prime Minister for the Conservatives. Public debt was down to 112.4% of GDP. This was the first time public debt had dropped below pre World War 2 levels, but it was still frightfully high.

Macmillan lost popularity and was replaced by Alec Douglas-Home as Conservative leader in 1963, and Harold Wilson had become Labour leader. As a result he won the 1964 election. By then public debt was down to 91.2% of GDP. The first time public debt was less than GDP since World War 1.

Labour's small majority saw Wilson call an early election in 1966, which he won with an increased majority. By then public debt had shrunk further to 82.3% of GDP.

The 1970 general election was won by the Conservatives, then led by Ted Heath. Public debt had by then shrunk further to 64.2% of GDP. Labour had continued with the level of fiscal prudence of the Conservatives.

After the second 1974 general election, Labour won a slender majority under Harold Wilson yet again. Public debt had been more seriously cut by the Conservatives, now down to 48.3% of GDP.

Between 1974 and 1979, Wilson was replaced by James Callaghan as Labour leader and Prime Minister, and Margaret Thatcher replaced Ted Heath as Conservative leader. By the time of the 1979 election, public debt had shrunk to 44% of GDP. Labour had not been as prudent as the Conservatives, but it would be a lie to claim Labour increased net public debt during that time.

In 1979, the Thatcher revolution started. By 1983 public debt had dropped slightly to 41.3% of GDP. A reduction on a scale less than that of the previous Labour administration, putting paid to claims of savage cuts during her first term.

By the 1987 election, Thatcher's second term had made further moves to cut debt down to 38.6%. Finally approaching levels seen before World War 1.

The 1992 election, which saw John Major having replaced Thatcher, saw public debt down to 24.6% of GDP. Lower than the level seen entering World War 1 and indeed lower than at any other time in the 20th century. The public debt had been tackled and assaulted by the Conservative government.

Sadly, John Major frittered it away. By 1997 when he was defeated by Labour led by Tony Blair, public debt had ballooned out to 43.8% of GDP. That single term led by John Major had wasted all that had been achieved before it under the Thatcher years. Public debt was back to nearly 1979 levels.

Blair and Labour entered power during boom years. By 2001, public debt had shrunk back to 32.1% of GDP, as Labour sought to demonstrate it was fiscally prudent during the first term, and as economic growth boosted tax revenue.

However, by 2005 Gordon Brown had let things slip. Public debt as a proportion of GDP had creeped back up to 37.4%, which during a time of economic growth and prosperity (and few tax increases) meant a significant spend up.

By 2009 it had shot up further to 55.2% and is now, conservatively, projected to be 82% in 2011.

The conclusion? World War 1 crippled the UK with a level of public debt that was not properly tackled until the Thatcher administration. However, whilst all post war government did watch public debt shrink, this was accelerated till by 1992 the UK was in the best fiscal position it had been for the century.

This was sadly blown by two government. John Major bears some responsibility for trying to spend his way into an election win in 1997, and failing miserably. Since then Gordon Brown let go after 2001 to have the net public debt grow during good time, and balloon once again during the recession. Public debt is now approaching levels it was at in the 1960s. Not insurmountable, but in great need of some attention.

About Me

Life, liberty and the pursuit of happiness. Politics, philosophy and economics from a pro-capitalist, libertarian, objectivist perspective. Born in New Zealand, live in the UK, career has been in transport, telecommunications and infrastructure policy.